ATO ID 2001/79
http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200179/00001
No guarantees against Part IVA but still a strong indication.
Convert PPOR to IP - husband buys wife out
- Thread starter ozgal
- Start date
ATO ID 2001/79
http://law.ato.gov.au/atolaw/view.htm?docid=AID/AID200179/00001
No guarantees against Part IVA but still a strong indication.
This private ruling also makes for interesting reading for anyone thinking of doing a spousal transfer.
http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/1011466416163.htm
The comments in regard to whether part IVA applies I found fascinating:
Regards,
Jason
http://www.ato.gov.au/corporate/content.aspx?doc=/rba/content/1011466416163.htm
The comments in regard to whether part IVA applies I found fascinating:
Regards,
Jason
Terry,
The link works for me .. not sure why.
The Authorisation Number is 1011466416163. It's quite an interesting read - they had a couple who both owned separate PPOR's prior to getting together and then sold them to each other to maximise tax deductable debt after getting married.
Regards,
Jason
The link works for me .. not sure why.
The Authorisation Number is 1011466416163. It's quite an interesting read - they had a couple who both owned separate PPOR's prior to getting together and then sold them to each other to maximise tax deductable debt after getting married.
Regards,
Jason
Thanks Jason.
The link worked second round but it seems this ruling isn't published yet.
1011466416163
Printable version
Edited version of private ruling
Authorisation Number: 1011466416163
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Last Modified: Monday, 6 December 2010
The link worked second round but it seems this ruling isn't published yet.
1011466416163
Printable version
Edited version of private ruling
Authorisation Number: 1011466416163
This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.
Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.
Last Modified: Monday, 6 December 2010
Hi Jason,
Thanks for posting the details of Authorisation Number 1011466416163.
I've read it a few times but not being a legal eagle, not 100% sure I understand it correctly.
My understanding is that the couple each had their own PPORs, which they sold (transferred) to each other to maximise deductable debt after getting married.
Did they complete these transactions before they got married so the situation was viewed the same way as if they had sold their respective properties to complete strangers?
If so, they would both have avoided paying any CGT on the sale of their properties. However, they would both have had to pay SD when purchasing each other's property (as they would with any purchase).
I imagine both properties would then have been rented out, to meet the investment property criteria.
Is that how it worked?
Coming full circle, back to the reason for my original post, as long as the reason my partner purchases my 50% share is to finance an investment property, should there be any problems with this?
I take it that we would have to vacate the premises by the settlement date of this sale/transfer coming into effect, so it would be seen as an IP.
Thanks for posting the details of Authorisation Number 1011466416163.
I've read it a few times but not being a legal eagle, not 100% sure I understand it correctly.
My understanding is that the couple each had their own PPORs, which they sold (transferred) to each other to maximise deductable debt after getting married.
Did they complete these transactions before they got married so the situation was viewed the same way as if they had sold their respective properties to complete strangers?
If so, they would both have avoided paying any CGT on the sale of their properties. However, they would both have had to pay SD when purchasing each other's property (as they would with any purchase).
I imagine both properties would then have been rented out, to meet the investment property criteria.
Is that how it worked?
Coming full circle, back to the reason for my original post, as long as the reason my partner purchases my 50% share is to finance an investment property, should there be any problems with this?
I take it that we would have to vacate the premises by the settlement date of this sale/transfer coming into effect, so it would be seen as an IP.
Yes that would be the wise move to make it a clean break.
It worked at last - I had to click the button to print on the top right.
There are 2 issues in this PBR - a couple having one main residence each, which means they cannot claim the CGT exemption on both.
Husband wants to buy wife's old main residence and wife wants to buy husbands old main residence and then both jointly purchase a new main residence while renting out the old.
The ATO seems to have no problems with this saying husband can claim the interest used on a loan to buy the wife's property and vice versa.
ATO also says this is a 'scheme' but even tho it is a scheme they won't apply Part IVA to deny the deductions because:
So they would have just sold the property and gone out to buy a new property anyway and this would have resulted in the same tax deductions.
Thanks Jason!
Hi Dazza,
Thanks so much for your detailed reply and sorry it's taken me a while to get back to you. Flat chat with work at present.
Sipping decaf here (red wine...so not!)
So the IP 100% owned by you at this stage was similar to our current PPOR in Prahran, i.e. at that point you had almost 50% equity in the property. What was the yield you were receiving when you were renting the property out?
Okay, so you purchase the whole former PPOR from your wife at this point and pay Stamp Duty. Wife does not pay CGT as it was her PPOR. You pay WA stamp duty. With you so far.
Our situation would differ slightly here, as our current PPOR is owned jointly and sale or transfer to spouse incurs no stamp duty. A little unsure here about how to proceed at this piont, ie if husband purchases my 50% share of PPOR while we are still living in it, will it be seen as a loan to finance an IP (if we are still living in the property at this point in time). We probably need to move out to make this work. I believe we have six months to nominate another poperty as PPOR.
Have to admit I get a bit bamboozled at this juncture...regarding sequence of events, i.e. when does buy-out occur, when does new country property purchase occur, to line all ducks in a proper row? We have cash savings of $260k, which would allow us to purchase country property up to value of $900k with LVR of 20%. That will change though once cash from buyout comes through and can pay down this loan (most if not all, depending on purchase price). Only hitch is that if the country property is purchased in my name only not sure my income of around $45k after tax will be sufficient (imagine not).
In effect, you bought your wife's PPOR from her 100%. She, in turn, purchased a 60% share of your old IP (now your joint PPOR). Did she have to pay stamp duty on this purchase? I take it she purchased to protect her percentage of this assett rather than just paying down the line without having her name on the title.
This is our aim.
In your case you had 100% stake in your new IP (wife's former PPOR). As you paid market value when you purchased from wife, what was the rental yield (2001)? (I imagine it's now CF+ in 2012).
However, as I've mentioned above, your original IP before you did the swap was worth $700k (purchased for $400k). Those figures sound similar to our our Prahran property (Value $1mil/$500 loan once husband does buyout).
Was your original IP able to stand on its own two feet at that time, what was the yield? If the yield was not great, is that the reason you converted it to your PPOR, in addition to upgrading your living situation from $170k property to $700k?
True, if yield is the only consideration. We are not 100% set on keeping the Prahran propety if there are better options. But, we are also taking into account factors apart from yield, i.e. CG, area attracts tenants of higher than average calibre, possible future development potential (renovate, knockdown build two townhouses) etc. We'd also have to pay stamp duty if we sold Prahran and purchased other IPs with better yield. Of course, maybe this thinking is not the smartest...!
Food for thought, that's for sure. Only problem is one of our main goals is to move to country property with acreage. Doubt this would be available as a rental...but could be possible. Would cost $700+ pw or thereabouts to rent something like this and would not have the feeling of permanence that buying a property would give.
If we sold Prahran and put $500-$600k from sale towards purchase in country, we would have around $400-500k to spend on IPs. Would this be sufficient for the type of high yield IPs you mention in Melbourne CBD?
Can see the value in this...husband already frazzled...hence, seeking move to the country.
Thanks Dazza, for sharing your experience and thoughtful insight. Hopefully, we will be able to sort through the options and come up with a workable plan to best suit all angles.
Thanks so much for your detailed reply and sorry it's taken me a while to get back to you. Flat chat with work at present.
Sipping decaf here (red wine...so not!)
So the IP 100% owned by you at this stage was similar to our current PPOR in Prahran, i.e. at that point you had almost 50% equity in the property. What was the yield you were receiving when you were renting the property out?
Okay, so you purchase the whole former PPOR from your wife at this point and pay Stamp Duty. Wife does not pay CGT as it was her PPOR. You pay WA stamp duty. With you so far.
Our situation would differ slightly here, as our current PPOR is owned jointly and sale or transfer to spouse incurs no stamp duty. A little unsure here about how to proceed at this piont, ie if husband purchases my 50% share of PPOR while we are still living in it, will it be seen as a loan to finance an IP (if we are still living in the property at this point in time). We probably need to move out to make this work. I believe we have six months to nominate another poperty as PPOR.
Have to admit I get a bit bamboozled at this juncture...regarding sequence of events, i.e. when does buy-out occur, when does new country property purchase occur, to line all ducks in a proper row? We have cash savings of $260k, which would allow us to purchase country property up to value of $900k with LVR of 20%. That will change though once cash from buyout comes through and can pay down this loan (most if not all, depending on purchase price). Only hitch is that if the country property is purchased in my name only not sure my income of around $45k after tax will be sufficient (imagine not).
In effect, you bought your wife's PPOR from her 100%. She, in turn, purchased a 60% share of your old IP (now your joint PPOR). Did she have to pay stamp duty on this purchase? I take it she purchased to protect her percentage of this assett rather than just paying down the line without having her name on the title.
This is our aim.
In your case you had 100% stake in your new IP (wife's former PPOR). As you paid market value when you purchased from wife, what was the rental yield (2001)? (I imagine it's now CF+ in 2012).
However, as I've mentioned above, your original IP before you did the swap was worth $700k (purchased for $400k). Those figures sound similar to our our Prahran property (Value $1mil/$500 loan once husband does buyout).
Was your original IP able to stand on its own two feet at that time, what was the yield? If the yield was not great, is that the reason you converted it to your PPOR, in addition to upgrading your living situation from $170k property to $700k?
True, if yield is the only consideration. We are not 100% set on keeping the Prahran propety if there are better options. But, we are also taking into account factors apart from yield, i.e. CG, area attracts tenants of higher than average calibre, possible future development potential (renovate, knockdown build two townhouses) etc. We'd also have to pay stamp duty if we sold Prahran and purchased other IPs with better yield. Of course, maybe this thinking is not the smartest...!
Food for thought, that's for sure. Only problem is one of our main goals is to move to country property with acreage. Doubt this would be available as a rental...but could be possible. Would cost $700+ pw or thereabouts to rent something like this and would not have the feeling of permanence that buying a property would give.
If we sold Prahran and put $500-$600k from sale towards purchase in country, we would have around $400-500k to spend on IPs. Would this be sufficient for the type of high yield IPs you mention in Melbourne CBD?
Can see the value in this...husband already frazzled...hence, seeking move to the country.
Thanks Dazza, for sharing your experience and thoughtful insight. Hopefully, we will be able to sort through the options and come up with a workable plan to best suit all angles.
Your husband will be purchasing a property. The loan for this property would be deductible if the property is being used to generate income so timing of moving out should not matter.
eg. if you bought a house for $500,000 with a $500,000 interest only loan and then moved out of it to rent it after 5 years the interest on the full $500k would be deductible. This loan was used to acquire the asset and the asset is income producing.
A similar situation here.
We've found that the counterfactual goes a VERY long way on these sorts of things. If the most likely alternative option would have had similar, or greater, deductions than the scheme itself; then Part IVA effectively becomes irrelevant.
Hi Terry,
Imagine if the couple were not married at this point in time and still claiming their own properties as their PPORs (i.e. not living together in either of them). They could sell them to each other and not pay any CGT. They would, of course, have to pay stamp duty on each of the purchases like any regular property purchase.
Could then go out and purchase their new home to live in together. Great mutual wedding present. This scenario depends of course on them being able to afford to finance the purchase of each other's former PPOR (thus creating two IPs with deductible debt) as well as the purchase of a new joint PPOR.
Might be something for couples in similar position to consider.
Imagine if the couple were not married at this point in time and still claiming their own properties as their PPORs (i.e. not living together in either of them). They could sell them to each other and not pay any CGT. They would, of course, have to pay stamp duty on each of the purchases like any regular property purchase.
Could then go out and purchase their new home to live in together. Great mutual wedding present. This scenario depends of course on them being able to afford to finance the purchase of each other's former PPOR (thus creating two IPs with deductible debt) as well as the purchase of a new joint PPOR.
Might be something for couples in similar position to consider.
You can have 2 main residences for a period of 6 months. s 118-140 ITAA 97
http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s118.140.html
But this probably won't apply if you time things right anyway. If you move into the new property at settlement then you won't be renting out the old property beforehand.
If your income is not enough for a loan then your husband could guarantee the loan an still stay off title.
This is probably a good way to proceed:
1. Get a preapproval for husband to buy wife's share. Borrow 100% for this if possible, ie costs too. Get IO loan with 100% offset.
2. Do this while continuing to live in house
3. Get lawyer going and loan full approval.
4. transfer title. Get your cash paid to your bank account.
5. You transfer your cash into your husband's offset account.
6. Keep living there while you look for the new property. No tax issues as it is not rented
7. work out your finances and get a loan pre-approval if needed
8. Find new property
9. Buy new property
10. Put up existing home for rent while waiting to settle on new property
11. settle and move in.
I dont' see any tax issues - as long as you don't pay down the husband's loan and redraw it later etc.
Spouse means not just those that are married but also, s995:
But note that at s 118-170 which covers spouses only having one main residence between then, there is an exception for "a spouse living permanently separately and apart from you)".
This is a good idea why it is not tax affective to live with your spouse! This may also give some the excuse they have been looking for to move out.
Yes, it could work as long as it was done early enough in the relationship
Hi Terry,
Thanks for clearing up the timing issues - it's been bugging the life out of me.
Husband is borrowing $500k to purchase wife's 50% share of the property (keeping in mind, that 50% of the poperty is already in his name). So, yes, he is purchasing property and borrowing to finance that. There is still $90k owing on the property though, so not sure how that works exactly. If he can borrow $500k for the wife and refinance the $90k into the new loan, he will have a $590k loan - structured as IO with offset account.
Is there any reason the ATO can frown upon this? Do they care if partners transfer 50% of property to their spouse? Is there any reason why partners cannot do this?
State Revenue Office should not have any concerns as stamp duty or CG are exempt on spousal transfer/sale of PPOR in VIC.
The property will remain CG free unless husband (who now has 100% ownership) purchases another property that he nominates as his PPOR. He may rent the property out for six years if he wishes and return to it as his PPOR (as long as he does not nominate another property as his PPOR).
So, in effect, husband could purchase wife's 50% of property. He now has sole ownership. Couple could move out and rent the property to tenants, the loan is now incoming producing, hence deductible (husband's highish income benefits from some neg gearing).
Couple rent a property somewhere themselves. (Wife uses interest earned on money from property transfer to fund this. Of course, wife will pay tax on the interest earned - against net income of around $45k).
Couple decide to purchase property in country (say, six months down the track). Wife uses funds in bank plus any savings to purchase this.
House is purchased in wife's name and now becomes PPOR of both husband and wife.
Can anyone see any problems with this from ATO viewpoint?
P.S. Sorry, Terry, did not see your step-by-step suggestions before I posted this.
Thanks for clearing up the timing issues - it's been bugging the life out of me.
Husband is borrowing $500k to purchase wife's 50% share of the property (keeping in mind, that 50% of the poperty is already in his name). So, yes, he is purchasing property and borrowing to finance that. There is still $90k owing on the property though, so not sure how that works exactly. If he can borrow $500k for the wife and refinance the $90k into the new loan, he will have a $590k loan - structured as IO with offset account.
Is there any reason the ATO can frown upon this? Do they care if partners transfer 50% of property to their spouse? Is there any reason why partners cannot do this?
State Revenue Office should not have any concerns as stamp duty or CG are exempt on spousal transfer/sale of PPOR in VIC.
The property will remain CG free unless husband (who now has 100% ownership) purchases another property that he nominates as his PPOR. He may rent the property out for six years if he wishes and return to it as his PPOR (as long as he does not nominate another property as his PPOR).
So, in effect, husband could purchase wife's 50% of property. He now has sole ownership. Couple could move out and rent the property to tenants, the loan is now incoming producing, hence deductible (husband's highish income benefits from some neg gearing).
Couple rent a property somewhere themselves. (Wife uses interest earned on money from property transfer to fund this. Of course, wife will pay tax on the interest earned - against net income of around $45k).
Couple decide to purchase property in country (say, six months down the track). Wife uses funds in bank plus any savings to purchase this.
House is purchased in wife's name and now becomes PPOR of both husband and wife.
Can anyone see any problems with this from ATO viewpoint?
P.S. Sorry, Terry, did not see your step-by-step suggestions before I posted this.
Unlikely as it is quite common. But for security always make sure the dominant purpose of the transaction is 'asset protection' or something else apart from income tax minimisation.
Hi Aaron,
How would husband purchasing wife's 50% of property be seen as asset protection?
How would husband purchasing wife's 50% of property be seen as asset protection?
